A Very Brief Survey of Northern Ontario Economic History

I have been working on an article surveying the economic history of northern Ontario and thought a summary overview draft of where I am going with it would be a worthwhile post. The entire article is going to be much more detailed but this excerpt below provides a pretty good overview of the direction it is going. Enjoy.

 A Very Brief Survey of Northern Ontario Economic History

Livio Di Matteo

 Northern Ontario’s economy began in the 19^th century as a booming resource frontier as a result of favourable international market demand for natural resource commodities which were supplemented by government policy initiatives in transportation and protectionism. Export-led growth approaches to development suggest that such a growth process can ultimately expand population and market size leading to self-sustaining economic growth, but Northern Ontario never made that transition and in the latter part of the twentieth century and early twenty first century can be viewed as having undergone arrested development. 

Northern Ontario is a vast region of over 800,000 square kilometers covering about 90 percent of Ontario’s land mass.  While long the home of a substantial and well organized indigenous and First Nation population[1], industrial economic development of northern Ontario under European settlement began in the 19^th century as a booming natural resource frontier driven by rising international market demand for natural resource commodities – mainly forest and mineral products – combined with government policy initiatives in transportation infrastructure and economic protectionism via what was known as the Manufacturing Condition.

In defining the region, it is important to note that is geographically, geologically and biologically a distinct region traditionally defined as the area of Ontario north of the French River – Lake Nipissing – Mattawa River system.  It is essentially Precambrian shield made up of some of the oldest rocks in North America and as a result of glaciation scraping its soil consists of shallow soils with some alluvial soil deposits in areas such as the Clay Belt regions and a mainly boreal forest ecology consisting largely of coniferous forest.[2]

In defining the region there is the question of borders as some include the Districts of Muskoka and Parry Sound in northern Ontario – as indeed they are for the purposes of federal and provincial regional development policies – while other might consider them not as the north but the ‘near’ north.[3]  There is also the question of thinking about the north as a region given that it is a very diverse area that in many respects is not one north but ‘many’ norths.[4] 

Geographically, there is the Northwest consisting of the Districts of Thunder Bay, Rainy River and Kenora while the other two-thirds of the region is the Northeast consisting of Cochrane, Timiskaming, Algoma, Sudbury, Nipissing and Manitoulin.  There is also the vast sparely populated area north of 50 which in some respects does not fit into either the northeast or northwest except by government fiat.  And of course, there is a rural remote north of small towns and Indigenous reserves as well as an urban north consisting of the five major cities – Thunder Bay, Sault Ste. Marie, Timmins, Sudbury and North Bay.  And the Northeast is also marked by a strong francophone population component while the region as a whole has a large Indigenous population.

The themes of Northern Ontario’s economic development are three-fold: natural resources, transportation and government.[5]  Northern Ontario’s economic development can easily be discussed within the framework of economic staples – products with a high natural resource content – given the importance of fur, lumber, pulp and paper and mineral products to the north’s economic history. As for transportation, this is a key theme given the importance of the Canadian Pacific (CPR) and Temiskaming and Northern Ontario Railway (TN & O) in providing access to northern Ontario resources in the 19^th and early 20^th centuries as well as providing the means for them to exit the region to world markets.  Finally, government is important given the federal role in providing transportation infrastructure that accessed and served the North such as the CPR, the Trans-Canada Highway and the St. Lawrence Seaway as well as the Ontario government given its parallel regional development program in the 19^th century consisting of the building of the TN & O as well as the protectionist Manufacturing condition and its own agricultural land settlement policy.

Given the importance of natural resources to northern Ontario’s economy, the analytical framework best-suited to outlining the causal relationships of the development process is the Staples Approach or more generally, models of export led development.  The Staples approach sees a region’s natural resource base as the most important determinant of both the pace as well as the patterns of economic growth with the classic exposition provided by Harold Adams Innis who viewed economic development as springing from the interplay between an industrial heartland and a resource reducing hinterland.[6]  In the case of northern Ontario, it can be viewed as a resource hinterland not only to the industrial south but also the rest of the world economy given the international market for its mineral and forest products.  More modern versions of the Staples Approach see economic development as the process of diversification around an export base with the degree of diversification a function of what are termed economic linkages.  These linkages involve producing inputs for the resource export sector or investing in industries that use the output of the export sector as an input as well as the final demand for domestically produced consumer products.[7]   

Figure 1 outlines the export led/Staples growth process with an increase in exports generating an increase in the regional economy’s output/income (Y).  The presence of rising income and economic opportunity in the resource sector leads to population increase both via natural increase but also migration into the region.  This leads to an increase in the labour force which feeds back into the generation of income.  As well, the increase in income leads to an increase in regional saving which fuels investment as well as external investment flowing into the region to provide the capital stock needed to expand production of the resource export.  This process continues in a circular fashion until both the income and population become large enough to provide a market for regionally produced goods and services on top of the export sector and it is this expansion of regional manufacturing production as well as services to meet local needs and substitute for imports that becomes the process of diversification.  A failure to grow and develop beyond the initial export industries that powered development can be seen as incomplete or arrested development.[8]

 Figure 1: A Model of Export-Led Growth

 

 The economic history of northern Ontario can be divided into a number of stages.  They are: 1) Pre-European Settlement to 1867, 2) Boom, Colonialism and European Settlement, 1867 to 1913, 3) Consolidation, Depression and War, 1914 to 1945, 5) Post-War boom, 1946 to 1969 and 6) Arrested Development: Economic Dependency and Decline, 1970 to the Present. 

The economic development of northern Ontario followed a process of export-led growth fueled in particular by the export of mineral and forest products.  International demand and private sector exploitation of the region’s resource abundance starting in the 19^th century was also accompanied by investment in transportation networks to bring resources out to market and government policies and initiatives designed to help facilitate development as well as take advantage of the public sector revenue potential of these resources.  Within this framework then, the three major engines of northern Ontario economic development are natural resources, transportation and government. 

During each of northern Ontario’s development periods outlined here, economic growth was most robust during eras where all three engines came together to provide the impetus for economic growth and employment creation.  The most robust economic growth and development occurred during the eras from 1867 to 1913 and 1946 to 1969.  Both of these eras coincided with good global economic conditions which fostered a demand for resource products and led to private capital investment in production facilities and transportation networks.  Both of these eras also saw a large spending and policy role for government which facilitated development.  The first era also saw northern Ontario as a major source of provincial government revenue.

Growth was poorer in the 1914 to 1945 as a result of erratic global markets, private sector weakness and the retreat of government involvement in northern development after the onset of the Great Depression and yet this was still an era of substantial population growth.  Economic growth since 1970 in the region has essentially stagnated along with population growth as a result of long-term technological change which reduced the labour intensity of natural resource extraction in the region.  While government did undertake more interventionist activity in an effort to arrest northern decline, it has failed to reverse the slow growth nature of the region given the absence of supporting private sector investment. 

---

[1] By the 17^th century, the mainly Algonkian culture Anishnawbe and Cree indigenous population had developed a seasonal woodland economy and lifestyle centered on hunting and trading. See Bray and Epp (1984: 8).

[2] See Robinson (2016: 8-9) for a fuller description of the region.  The glaciers of the various ice ages periodically scraped topsoil off in northern Ontario and deposited it further south ironically enough making nature responsible for the first set of “resource transfers” from Ontario’s north to the south. According to Louis Gentilcore (1972: 7-8): “The acid nature of the podzols, the slower breakdown of the vegetable matter, and the prevalence of peaty soils create problems in the utilization of the soils of northern Ontario for commercial agriculture.”

[3] The 2011 provincial Growth Plan for Northern Ontario (2011) for example includes Parry Sound.

[4] For one point of view, see Miller (1985).

[5] See Di Matteo (1991, 1999) for overview of these themes.

[6] Innis (1930/84).

[7] These are generally known as backward, forward and final demand linkages.  See Watkins (1963).

[8] Part of this process of arrested development could also be referred to as a Staples Trap whereby an economy is not able to move beyond its initial export sector activities.  For a discussion of the Staples Trap see Watkins (1963).

References

Bray, M. and E. Epp, eds. (1984) A Vast and Magnificent Land: An Illustrated History of Northern Ontario. Ontario Ministry of Northern Affairs.

Di Matteo, L. (1991) “The Economic Development of the Lakehead During the Wheat Boom Era: 1900-1914,” Ontario History, LXXXIII, 4, December, 297-316.

Di Matteo, L. (1999) “Fiscal Imbalance and Economic Development in Canadian History: Evidence from the Economic History of Ontario,” American Review of Canadian Studies, Summer, 287-327.

Innis, H.A. (1930/1984) The Fur Trade in Canada, Toronto: University of Toronto Press.

Miller, T. B. (1985) “Cabin Fever: The Province of Ontario and its Norths.” In D.C.D.C. MacDonald, ed., The Government and Politics of Ontario. 3rd ed. Scarborough:Nelson, Canada, 174-191.

Ontario (2011) Places to Grow: Growth Plan for Northern Ontario.  Toronto: Ministry of Infrastructure and Ministry of Northern Development, Mines and Forestry.

Robinson, D. (2016) Revolution or Devolution?: How Northern Ontario Should Be Governed. Northern Policy Institute. Research Paper No. 9, April.

Watkins, M. (1963) “A Staple Theory of Economic Growth,” Canadian Journal of Economics and Political Science, 29, 141-158.

Thunder Bay's Economic Evolution: A Brief History

From its origins as a fur trade company headquartered at Fort William, to the development of the grain and forest sectors, Thunder Bay’s economy has seen ebbs and flows over the course its history.  Key to its modern economic development was the federal government decision to route the Canadian Pacific Railway through the Lakehead and the arrival of the transcontinental railway in the 1880s.  Indeed, without this explicit government intervention it is unlikely Thunder Bay would have developed into a city as large as it is today.  Government action in assorted forms has been one of the pillars of Thunder Bay’s economy. 

Transportation is another pillar of Thunder Bay’s economy.  During the first decade of the twentieth century, there was a massive boom rooted in infrastructure building for the transport needs of the western Canadian grain economy that saw the twin Lakehead cities of Port Arthur and Fort William become the largest grain port in the world.  At its peak, over 30 grain terminals lined the waterfront.  Indeed, growth was so rapid that many believed the Lakehead would become the Chicago of the North.  Population quadrupled between 1901 and 1911 and the real per capita value of new construction was never higher than during this period.

Yet, as the twentieth century wore on, there was growing realization that as well as Thunder Bay was doing, it was not going to be the Chicago of the North.  The remainder of the twentieth century saw continued but slower growth and Thunder Bay’s ultimate evolution was more akin to Duluth Minnesota – the American Lakehead – rather than Chicago.  Thunder Bay’s economic growth slowed in the wake of World War I and the Great Depression and resumed during the resource boom of the 1950s and 1960s.  Indeed, natural resource extraction and processing whether forestry or mining have always been another pillar of Thunder Bay’s economy.

Port Arthur and Fort William amalgamated to form Thunder Bay in 1970 ending the urban competition that in retrospect appears correlated with better economic performance given the economic slowdown that ensured.  After 1970, labor saving technological change, aging capital stock, a shift in world grain markets and increasing international competition also eroded the competitiveness of Thunder Bay’s grain transport and forestry sectors culminating in the forest sector crisis, which saw substantial job losses in Thunder Bay and the surrounding region.  These job losses were aggravated by high energy costs with respect to electricity which were especially damaging to the energy intensive pulp and paper sector.  Total employment in Thunder Bay has never recovered from the peaks reached in the first years of the twenty first century.

In the wake of the forest sector crisis, recent years have seen a stabilization of the Thunder Bay economy and a shift in its composition towards employment in research, regional health and social services, and higher education.   This base continues to support a growing range of retail and service activities particularly in hospitality and accommodation oriented around a growing tourism scene that has drawn some international attention.  Nevertheless, economic growth has been slower compared to the rest of Canada and Ontario. While the unemployment rate in Thunder Bay is low, it is because the labor force has shrunk faster than employment as a result of an aging population and youth out-migration.  Population in Thunder Bay peaked in the 1990s and has declined slightly since.   While the First Nation’s population has been expanding, its future economic engagement hinges on the long-term success of initiatives to expand human capital via education and training.

 

As for the future, tomorrow is yesterday as Thunder Bay’s economic future will still rely on its traditional three pillars – government, transportation and natural resources.  These pillars will of course make use of new knowledge and technology and will require innovative entrepreneurial vision to recognize and implement new opportunities. Thunder Bay’s transportation infrastructure and its pivotal location on the east west transport corridor, the role of regional government services and the ongoing potential of the mining sector combined with information technology and the knowledge economy will be the economic forces propelling its future.

A version of this article was originally composed for Lake Superior News appearing there October 16^th in advance of the October 20^th Lakehead University In Conversation Talk at Brodie Library titled Going from Chicago to Duluth of the North: Thunder Bay’s Economy in the Past, Present, and Future.  

A Brief History of Federal Budgets

The following op-ed appeared in the Waterloo Region Record, March 16^th, 2017 and the New Brunswick Telegraph-Journal, March 13^th, 2017.

The upcoming federal budget comes in Canada's 150th year — an important milestone for what is perhaps the most successful country in the world. The evolution of federal finances since 1867 reflects a changing economy and offers important lessons regarding the perils of persistent deficit spending and growing indebtedness.

Canada's federal government has indeed grown. In 1867, it had a budget of $14 million, an expenditure-to-GDP ratio of approximately five per cent, a net debt of $75.7 million, and a net debt-to-GDP ratio of 20 per cent. Transportation, communications and economic development accounted for a quarter of federal spending, and transfers to other governments 20 per cent. Meanwhile, debt service charges were 27 per cent due the newly formed federal government assuming provincial debts. There were no transfers to persons.

By comparison, total federal government spending in 2017 is estimated at $331 billion with an expenditure-to-GDP ratio of nearly 16 per cent and a net federal public debt of $760 billion, resulting in a debt-to-GDP ratio of 36 per cent. Assorted transfers to persons and other levels of governments now account for nearly two-thirds of federal government spending.

Until the First World War, customs duties dominated federal government revenue. The war effort sparked the search for new revenues leading to the creation of the first personal and corporate incomes taxes and the first federal sales tax. Over time, the importance of these three new revenue sources grew, and in 2017 it's anticipated that the personal income tax alone will make up 51 per cent of federal government revenue, with corporate taxes comprising 13 per cent and commodity taxes (GST, excise taxes and customs duties) making up 17 per cent.

The 150 years since Confederation have seen the federal government's primary focus transition from the active economic development of a country grounded in liberal economic principles to an activist role partly aimed at bringing about a more egalitarian society via social spending. Despite the benefits, expanded federal spending in the post-Second World War era — given the subsequent slowing of economic growth, rising interest rates and the absence of more concerted fiscal discipline — ultimately resulted in the 1990s federal debt crisis.

Prudent government spending is useful, such as the construction of the transcontinental CPR railway where subsidies encouraged the building of a risky transportation project. However, the same strategy also saw over-subsidization of the CPR and substantial subsidies to two other less-successful rail lines. More government spending is not always better, and that also applies to deficit financing.

Over the period 1867 to 2017, Canada's federal government ran a deficit nearly three-quarters of the time, with the largest deficits-to-GDP ratios during the two world wars and the great divergence between revenues and spending leading to the 1990s debt crisis. Large deficits and interest rates greater than the economy's growth rate during the 1970s and 1980s lead to a rising debt-to-GDP ratio and the federal fiscal crisis of the early 1990s.

The important policy decisions when it comes to spending are when to spend, what to spend, how much, and how to pay for it. The wrong answer to any of these questions has negative fiscal implications.

Given the surge in federal deficit financing in the wake of the 2016 budget, one wonders if the lessons of the 1990s have already been forgotten. While interest rates remain at historic lows, economic growth is also low, making a case for fiscal prudence given the dynamics of deficits and debt. The progress made in reducing the federal net debt-to-GDP ratio below 40 per cent will be largely squandered if we allow debt to once again grow uncontrollably.

Livio Di Matteo is a senior fellow at the Fraser Institute and professor of economics at Lakehead University. He is the author of “A Federal Fiscal History: Canada, 1867-2017.” Distributed by Troy Media